Is the five-day winning streak on Wall Street on Thursday, which looked to be turning into a sixth day of positives for stocks, a case of the market rising too fast?
Before the close (because we send this Report out before the bell rings at the NYSE), the Dow was down only 4.72% from its all-time high, the S&P 500 was off 4.33% and Nasdaq was only 2.9% lower!
So you can see why some are asking: “Is this comeback too fast?” And this then begs the question: “Are we setting ourselves up for another big sell off?”
The answers are “probably” and “yes” but I’d add “don’t worry” because the past two weeks show that buyers still outnumber sellers. Even better, both the economic and company profits stories explain why buyers are more numerous than sellers but, unfortunately for long-term investors, we’re now in the volatile zone of this bull market.
My job has become harder because I have to convince you to ignore your fear when markets behave madly, as they will for the next year or two. And there’s an additional curve ball on the impact of complicated investment products linked to the VIX and derivative-based ETFs.
I’m hoping regulators are onto these potential threats to orderly markets and that undoubtedly explained why US equity markets fell so dramatically two weeks ago.
In some ways, the Dow’s 5%-6% recovery since the sell off is not all sell off overreaction being offset by smart players buying unfairly beaten up stocks because some would be making up for the overreaction via these tricky VIX products.
The VIX quite rightly is called the “fear index”.
Of course, when markets slide big time, we all become technicians, just like when it’s too hot for too long and we’re all meteorologists!
Looking at the S&P 500, it’s now around the 50-day average. It’s fair to say the Yanks overbought in January and then oversold in February and now investors and traders are trying to work out fair value.
And while I’ve regularly talked about the current, good US economic story and the current, good company reporting season for Q4 of 2017, you have to know that the Q1 projections for 2018 earnings is an 18% uplift, which has to explain some of this rebound.
This is my strongest argument for optimism and why this overall market comeback might be too fast, but it’s understandable.
Maybe Wall Street needed a 5%-6% pullback because of the wage and employment data but the VIX-related products pushed the Dow down over 10%, so now fundamental value buying is bringing stock prices up to what the new level should be, at least for now.
If you need more proof that markets are surely not ready for Armageddon yet, then check out this overnight headline from CNBC Europe: “European stocks close higher after strong earnings; Stoxx 600 up 1.1%”. This is music to my ‘eyes’!
And in the US, the headline was: “Dow jumps 200 points, stocks on track for best week since 2011!” That’s my exclamation point but it’s deserving! And so was that one.
I don’t ever use history for making my big, “how long can this bull market last calls” but I do like it when it helps me beat some fears. And right now we’re all in battle between the fear of missing out on another leg up and being caught too long stocks when a crash comes.
Secular bull markets 1949 to 1966, 1982 to 2000 tend to last on average over 14 years and they compound at about 16% per annum. So the present US bull run is only under 10 years old. Given my analysis says get wary in 2019 for maybe problems in 2020 for Wall Street, I’m happy to keep telling you to buy the dips on stocks that have been oversold and indexes, such as the S&P/ASX 200.
That’s the US market now, so let’s head home to see what we learnt this week. Friday’s small loss was disappointing but we are wimps. Let’s face it, the combined economic and company profits story isn’t as strong as the US, though I reckon our economic growth in 2018 could end up being better than the Yanks. We’re not helped by that damn Aussie dollar, which is now 79.11 US cents, after being nearly two cents lower when equity markets were having their hissy fits.
Still it was nice to see our market up for the week (1.1% to end at 5904) but it still is underwhelming.
Let’s work out why – ‘wimpishness’ aside.
Reporting season hasn’t been bad but it hasn’t excited the market, though the health care sector had a good week, up a tick over 5%.
The resource sector is back in favour but our banks are still copping negativity, with the Royal Commission not helping. Our index needs these guys to deliver to power us higher.
I’ve said before that I think the banks will prove to be a sound contrarian play over the next year or two.
This is AMP’s Shane Oliver’s take on the company show-and-tell session so far:
“It’s still early days in the December half profit reporting season with only a third of companies having reported, but so far it remains reasonably good. 46% of results have exceeded expectations against a norm of 44%, 74% have seen profits rise from a year ago and 72% have increased dividends from a year ago.” However, only about 49% have seen their share price rise on reporting day. But as Shane points out, these are still early days.
What I liked
- In the 12 months to December 2017, the Budget deficit stood at $22.1 billion (around 1.3% of GDP) – the lowest rolling annual deficit for over four years.
- Jobs rose for a record 16th straight month, up by 16,000 in January, after rising by 33,500 in December (previously reported as a rise of 34,700 jobs). Full-time jobs fell by 49,800, while part-time jobs rose by 65,900. Economists had tipped an increase in total jobs of around 15,000.
- The unemployment rate fell from 5.6% to 5.5%.
- The NAB business conditions index rose from +12.8 points to +18.9 points in January – the fourth best monthly outcome on record.
- The NAB business confidence index rose from a downwardly-revised +9.6 points (previously: +11.1 points) to +11.8 points – the highest level in nine months.
- Shares in Apple rose by 3.4%, after Warren Buffett’s Berkshire Hathaway revealed that the bellwether technology company was its largest common stock investment.
- The Philadelphia Federal Reserve business index rose from 22.2 to 25.8 in February (forecast 21.1).
- US housing starts rose 9.7% in January, easily surpassing analyst expectations.
- Consumer sentiment rose more than expected, according to a preliminary reading from the University of Michigan. It came in at 99.9, while the estimate was only 95.5.
- The US consumer price index (CPI) rose by 0.5% in January (forecast +0.3%). Excluding food and energy (core measure), prices rose by 0.3% (forecast 0.2%). The CPI is up 2.1% on the year, with the core rate up 1.8%. (Inflation on the rise confirms the US growth story.)
- The NFIB Small Business Optimism Index in the US rose to 106.9 in January (forecast 105.3) from 104.9 in December.
What I didn’t like
- Reporting season has been underwhelming and some outlook statements didn’t help stocks’ optimism. But next week, there’s a swag of company reports and that’s when we’ll get to see how corporate Australia is doing.
- Total new lending commitments (housing, personal, commercial and lease finance) fell by 4.4% in December. However, lease loans rose to 16½-year highs in rolling annual dollar terms.
- The RBA view delivered by Governor Phil Lowe, who thinks the progress on lowering unemployment and increasing inflation will be slow.
- Fairfax Media reports that: “The US dollar index, which measures the greenback against a basket of currencies, has fallen every day so far this week and is set for its worst weekly showing since mid-2017.” So the US gets the dollar-driven growth that we should be getting.
- US retail sales fell 0.3% in January (forecast +0.2%). The December data was revised down to a flat result from the earlier estimate of a 0.4% gain.
A likeable dislike
The Westpac-Melbourne Institute monthly survey of consumer sentiment dropped 2.3% to decline to 102.7 but January’s reading was a four-year high of 105.1!
The index has remained above 100 for the third straight month. This means optimists have been outnumbering pessimists for three months, which is a good sign.
So what happened with the latest reading?
The survey was taken from over the week of February 5 to February 11, when the stock market went crazy and consumers were spooked. “These concerns appear to have been acutely felt by retirees whose confidence fell by 13.5%,” said Westpac chief economist Bill Evans. I suspect they were retirees who don’t subscribe to this Report!
By the way, as I was writing this Report, US market indexes lost a lot of their early gains. Quite frankly, six days of rises looked a little rich, even for me. I’m happy for a few down days for sensible profit-taking, provided the up days are more numerous. That said, who knows what will happen in the last hour on Wall Street?
The Week in Review:
- How does last week’s drama change my investment strategy? I explain here [1].
- As bank share yields move higher it could be time to sit the hybrid market out. Paul Rickard [2] said that Westpac’s new hybrid is no bargain!
- James Dunn [3] expects solid earnings numbers with Boral and Cochlear to beat expectations.
- Don’t run away from the clearance sale. You can still get unchanged earnings and dividend forecasts at lower prices. Charlie Aitken [4] said this remains a buying opportunity in equities.
- Tony Featherstone shared with us 3 mid-caps to consider in a sell-off storm [5], saying they can offer value in an uncertain and volatile market.
- In a busy week NAB received two upgrades, while James Hardie got two downgrades. Rudi Filapek-Vandyck discusses in our first Buy, Hold, Sell – what the brokers say. [6]
- In the second Buy, Hold, Sell- what the brokers say [7], Boral and Cochlear were upgraded.
- And in this week’s Hot Stocks [8], REA Group, Aristocrat Leisure and a Chinese white goods company are popular.
- Saunders International, a niche small cap operator was featured in this week’s Professional’s Pick. [9] As well as a US listed botox-maker Allergan [10].
- And Paul Rickard answers all of your Questions of the Week [11] including queries about ETFs and capital raising by Westpac.
Top Stocks – how they fared:
What moved the market?
- Rising US interest rates that are causing a strong Aussie dollar and a weaker greenback.
- The Wall Street correction also moved the market this week and after five days of highs is it safe to go ‘back into the water?’
- Increase in US inflation
- Bitcoin rose above US$10,000 for the first time in more than two weeks after having fallen 70% from its peak in December.
Calls of the week:
Charlie Aitken said that this market remains a buying opportunity in equities [4].
Malcolm Turnball banning all ministers from engaging in sexual relations with staff members after the Barnaby Joyce scandal.
The Week Ahead:
Australia
- Monday February 19 – Tourist arrivals/departures (December)
- Tuesday February 20 – Reserve Bank Board minutes (February)
- Tuesday February 20 – Speech by Reserve Bank official
- Wednesday February 21 – Wage Price Index (December Quarter)
- Wednesday February 21 – Construction work (December quarter)
- Wednesday February 21 – Skilled internet job vacancies (January)
- Thursday February 22 – Average Weekly Earnings (November)
Overseas
- Monday February 19 – US Public Holiday
- Wednesday February 21 – US Existing home sales (January)
- Wednesday February 21 – US Federal Reserve minutes (January)
- Wednesday February 21 – ‘Flash’ purchasing managers (February)
- Thursday February 22 – US Leading Index (January)
- Thursday February 22 – Speech by US Federal Reserve Bank official
- Saturday February 24 – China Property prices (January)
Food for thought:
“Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” – Sir John Templeton
Stocks shorted:
ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table shows how this has changed compared to the week before.
Charts of the week:
Source: Commsec
Source: Commsec
Top 5 most clicked:
- How does last week’s drama change my investment strategy? [1] – Peter Switzer
- 4 stocks to buy on a correction [12] – Tony Featherstone
- This remains a buying opportunity in equities [4] – Charlie Aitken
- 3 mid-caps to consider in a sell-off storm [5] – Tony Featherstone
- Buy, Hold, Sell – what the brokers say [6] – Rudi Filapek-Vandyck
Recent Switzer Super Reports:
Monday 12th February: As the dust settles? [13]
Thursday 15th February: Same, same but different [14]
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.